Debt

One of the things Mike Ashley is commonly praised for by the media and fans alike is “clearing the debt”, which according to many statements made by club officials including Mike Ashley himself, would have threatened the future of Newcastle United had he not stepped in. This perception could not be further from the truth. As we will show, the club’s debt has not been “cleared”, and has in fact doubled since Mike Ashley took over.

It’s worth pointing out that debt is a funny and almost dirty word nowadays. In a world coming to terms with the long lasting effects of a global financial crisis, caused by over-lending, there is very little justification for this. With the vast majority of companies, including football clubs, holding certain amounts of debt, which is simply a way of funding any business’ assets and growth. This can consequently become problematic if the contractual obligations of interest and debt repayments cannot be met.

In 2007, when Mike Ashley took over, Newcastle United had a debt of £70m – mainly with Barclays Bank, which sounds like (and is in absolute terms) a lot, but its assets (stadium, training ground, players, brand etc.) were valued significantly higher at £163m (source: NUFC accounts 2006), meaning the club was more than 57% self-funded.

Despite the debt appearing manageable at that point, with yearly interest payments of £6m, and pertaining mostly to the 1998 stadium expansion (an asset adding to long term matchday revenue), Mike Ashley and his representatives have made much about the level of debt when they took over the club. The accusations made were that the club mightn’t have survived had Ashley not taken over from former Newcastle chairman and part-owner, Freddy Shepherd. To disclose, the following information below relates to the nature of the debt and the requirement for it to be repaid upon the event of Sir John Hall selling his shares (16 September 2008):

“It’s absolutely ridiculous; everything was covered. But what Ashley didn’t realise was that he had to pay off the mortgage on the stadium. If the Halls lost control, that debt had to be paid immediately. The largest part of the debt was the stadium and I think he had to pay around £57m.”

The vast majority of loans given by banks include a ‘change of control’ clause which will require the repayment, in full, of any outstanding loans in the event of a change of ownership in a company which has been bought. It is inconceivable to think that a successful businessman such as Ashley and his legal team would not have anticipated the existence of such a clause, given how common they are.

Furthermore, it is fair to say that Mike Ashley has NOT cleared the club’s debt upon completing his takeover bid or even at any later stage. However, he has merely transferred it from one debt creditor – Barclays Bank, to another – MASH Holdings Limited (Mike Ashley’s holding company of which he is the sole shareholder), because he was contractually obliged to repay the loan to Barclays.

By contrast, owners of many other Premier League clubs have actually converted their loans into equity, effectively writing off the loan (debt) in order to maximise the financial performance of the club. Examples include: Abramovich at Chelsea (£340m), Mansour at Manchester City (£305m), Al Fayed at Fulham (£212m), Lerner at Aston Villa (£90m), Short at Sunderland (£69m) and Leibherr at Southampton (£38m).

Not only has the debt not been cleared, but Mike Ashley has also essentially doubled the amount of debt. The figure below points out the development of the amount of debt of Newcastle United, excluding bank overdrafts, which pushed the amount above £150m in 2009 and 2010. Source: Swiss Ramble):

It’s interesting to investigate how the clubs debt has grown so significantly since Mike Ashley’s takeover after years of being relatively stable, (despite regularly posting losses). The board clarified this in various fan forum meetings (23 September 2013 and 24 February 2014):

“The board stated that relegation came with hefty price tag and that fortunately, we have an owner who was able to fund that by injecting £29m interest-free. The intention was always that the £29m was a short-term loan to get the club through the relegation period. £11m was duly paid back, with £18m due to be paid back. That sum has not been paid back yet, nor is there an intention to pay it back this season. MA had to put £111m in to clear external debt and won’t be paid back until the day MA sells the club. JI [John Irving, Chief Financial Officer] explained that an interest-free, long-term loan of this kind is as good a debt as you can get and we were very fortunate to have it.

“Of that, £58m was for the stadium and £29m was needed to clear the outstanding transfer fees that we owed other clubs for players that we’d already bought prior to MA purchasing the club (Albert Luque, Damian Duff etc.) The board explained that due to MA, we now have a policy of paying up front in cash for players and that in turn can save the club money.

“The board explained that it would be an option that some clubs would consider [the owner actually writing off the debt], but from the perspective of our group structure there’s a requirement to have debt within the structure.

“[Responding to a suggestion that the commercial value of Sports Direct advertising could be coming off the debt] The board explained that the owner’s position is clear and that the Club is not attempting to hide it. To add context, it was explained that the Club’s debt cost £8m in interest alone every year before Mike Ashley purchased the club.”

Of the existing £70m debt transferred to MASH Holdings Limited after the takeover, £58m was for the stadium (expansion), i.e. development of an asset (investment) which would yield higher matchday revenue over a long term.

Mike Ashley decided to “clear” £29m-worth of outstanding transfer fees owed to other clubs, for players bought prior to Mike Ashley purchasing the club. The practice of spreading transfer fees over a number of years was, and still is, fairly commonplace in football. This would presumably also have been applicable to incoming transfer fees (which never gets mentioned in these debt discussions, but would certainly represent a windfall).

Relegation to the Championship; which can be firmly laid at the feet of Mike Ashley and Derek Llambias’ bad decision-making in that ill-fated season. With the lack of investment, the backing of Dennis Wise over Kevin Keegan, and the appointment of inadequate (Joe Kinnear), and inexperienced (Alan Shearer) managers, costing the club £29m. This same cost has seemingly been added to the club’s debt, and apparently needs to be repaid to Mike Ashley, in contrast to the rest of the debt (£11m already paid back and £18m due to be paid back).

The debt owed to Mike Ashley is provided as a loan, free of interest, for the club, and whilst this sounds very generous, the lack of interest payment has been used as justification for the non-payment by Sports Direct for St. James’ Park commercial space, (including stadium naming rights). This has resulted in a massive loss of commercial revenue for the club, far outweighing the yearly £6.5m interest payments when Ashley took over (not the £8m claimed by the club; source: Swiss Ramble). It is also worth noting that the interest percentage mentioned in the club accounts is not indicated as being zero, but LIBOR +0.5%, presumably meaning that it is at the discretion of Mike Ashley to make the club pay interest on the debt if he felt so inclined. Alternatively, it may be that the loan agreement might include a provision that states that any interest will be rolled up and be added to the debt owed to MASH Holdings Limited and payable upon Ashley’s exit.

The club are openly admitting that Newcastle United’s debt is there by design as the group structure (i.e. MASH Holdings Limited and its other shareholdings) requires debt within the structure. This can only be interpreted as it being financially beneficial (via reduced taxation?) to Mike Ashley personally, for Newcastle United to be in debt to his holding company. Despite what many journalists and fans believe, the club has no interest in paying off the debt from the profits it currently generates, something that could at least be beneficial for the club in the longer term.

The debt, whether covered by an interest free loan or not, and whether repaid over time or not, will have to be paid back to Mike Ashley (or his holding company) sooner or later, one way or another, but most likely as part of an inflated purchasing price in any future club takeover.

Notwithstanding all of the above, the club actually expect the fans to be grateful about our debt position under Mike Ashley stating that we are very fortunate to have it.

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